The ATO has released a discussion paper on its draft practical compliance guideline for offshore hubs. Think of it as the ATO’s risk-differentiation framework applied to offshore marketing hubs but on steroids. The purpose of the guideline is for taxpayers to understand the ATO’s view of the transfer pricing risk applicable to their offshore hub and the likelihood of ATO compliance activity.

The guideline uses 5 colour zones to rank the risk to revenue of offshore hubs (green = low to red = very high). The primary test is a cost plus benchmark. If the hub’s mark-up on its costs (e.g. salary of overseas staff, rent, etc) is 100% or less, then (subject to also passing a secondary cross-check test which is yet to be finalised) the taxpayer’s hub will be in the green zone (low risk). The ATO warns against mark-ups “drifting” up towards this 100% benchmark if currently below it. The benefits of being in the green zone are limited ATO compliance activity, simplified transfer pricing record keeping requirements and access to the advanced pricing arrangement (APA) program.

If the hub’s profit is greater than 100% of its costs or the secondary cross-check test is failed, the taxpayer’s hub will be in either the blue, yellow, amber or red zone depending on:

  • the net tax impact of the hub;
  • the existence of transfer pricing documentation; and
  • behavioural aspects of the taxpayer (e.g. level of co-operation and transparency with the ATO).

Moving up in the different zones brings with it a stricter compliance approach from the ATO.

If taxpayers want to transition existing arrangements to the green zone, the ATO will (for the first 12 months) remit penalties and interest if a voluntary disclosure is made in relation to prior years. Although, the ATO also accepts that just because a taxpayer wishes to come within the green zone going forward this does not mean that prior year arrangements were non-arm’s length.

The ATO will use the reportable tax position (RTP) schedule to obtain information about a taxpayer’s marketing hubs and their risk rating under the guideline.

At the moment the guideline only deals with marketing hubs but it is intended that over time additional schedules will be added for other types of hubs (e.g. procurement hubs).

Comments on the discussion paper are due by 30 September 2016.